INCORPORATED BY REFERENCE, PAGE 14 OF THE COMPANY'S 1997 ANNUAL
                      REPORT TO SHAREHOLDERS

SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>

                                                                               Years Ended December 31
                                      1997                   1996                 1995               1994                  1993
<S>                            <C>                   <C>                  <C>                  <C>                  <C>

Policy Revenue                 $    35,193,472       $    31,116,162      $   28,073,997       $   24,893,483       $    22,156,822
Investment & Other Income           50,642,561            46,617,179          41,519,626           36,100,738            31,363,811
Realized Gains on Investments        5,201,365             4,986,897           7,483,798            4,411,334            10,433,318

Total Revenue                  $    91,037,398       $    82,720,238      $   77,077,421       $   65,405,555       $    63,953,951

Benefits & Expenses                 60,834,143            56,077,551          50,673,549           38,926,049            36,077,676

Income from Operations              30,203,255            26,642,687          26,403,872           26,479,506            27,876,275

Federal Income Tax (Benefit):
     Current                         9,004,943             5,378,656           7,607,573            8,179,901             8,275,631
     Deferred                        1,637,944             3,597,781             914,707            1,469,927             1,496,402
Total Federal Income Tax            10,642,887             8,976,437           8,522,280            9,649,828             9,772,033

Cumulative effect on years prior to
1993 of changing the method of
accounting for income taxes                  0                     0                   0                    0              (567,610)

Net Income                     $    19,560,368       $    17,666,250      $   17,881,592       $   16,829,678       $    17,536,632

Net Income per share           $          2.07       $          1.87      $         1.89       $         1.78       $          1.86
Cash dividends declared
  per share                    $          0.54       $          0.50      $        0.453       $         0.40       $         0.367
Total Assets                   $   832,533,863       $   740,650,660      $  673,794,161       $  528,632,132       $   455,135,563
Shareholders Equity            $   160,379,201       $   132,630,489      $  128,905,402       $   90,855,581       $    89,744,886
Book Value per share           $         16.97       $         14.03      $        13.64       $         9.61       $          9.50
Average Number of
  Shares Outstanding                 9,450,000             9,450,000           9,450,000            9,450,000             9,450,000
<FN>
All per share data has been adjusted to give retroactive effect for the three-for-one common stock split effective May 2, 1996.
</FN>
</TABLE>

                                       113
<PAGE>
INCORPORATED BY REFERENCE, PAGE 15 OF THE COMPANY'S 1997 ANNUAL
                      REPORT TO SHAREHOLDERS



                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF

                   FINANCIAL CONDITION & RESULTS OF OPERATION


The following  discussion and analysis  should be read in  conjunction  with the
financial  statements  and related  notes found on pages 25-32,  as they contain
important  information  that is helpful in evaluating  the  Company's  operating
results and financial condition. (Note: A glossary of certain terms used in this
discussion  can be found on page 23 herein.  The terms are  italicized the first
time they appear in the text.)


OVERVIEW

Erie  Family  Life  Insurance  Company  (the  Company)  is  incorporated  in the
Commonwealth of Pennsylvania.  The Company is engaged  primarily in the business
of  underwriting  and  selling  non-participating   individual  and  group  life
insurance policies,  including universal life and annuities. The Company markets
its  products  through  independent  agents and  operates in eight states in the
eastern United States and the District of Columbia and is subject to supervision
and  regulations of the states in which it writes  business.  A large portion of
the Company's business is written in Pennsylvania.

Net  income  increased  to  $19,560,368,  or  $2.07  per  share,  in  1997  from
$17,666,250,  or $1.87 per share in 1996, an increase of 10.7 percent. Operating
results remained strong as policy revenue  increased by 13.1 percent in 1997 and
life insurance in force  increased by more than $1.1 billion during 1997.  Total
life  insurance  in force at  December  31,  1997  increased  to more than $11.9
billion.


RESULTS OF OPERATIONS

REVENUES

Policy Revenue

Life premiums  increased 13.0 percent to $32,826,827 in 1997 from $29,038,797 in
1996 and $25,764,413 in 1995. The growth in total life premiums is a function of
growth in new life  insurance  premiums  and the renewal of policies  written in
prior  years.  New life  insurance  coverage  placed  in force  during  1997 was
$2,224,323,000  compared to $2,129,639,000  in 1996 and  $1,877,983,000 in 1995.
This  represents  an  increase  of 4.4  percent in 1997 and an  increase of 13.4
percent in 1996  compared  to 1995.  First-year  life  insurance  premiums  were
$6,860,504 in 1997,  $6,505,484  in 1996 and  $5,624,117 in 1995, an increase of
5.5 percent in 1997 and 15.7 percent in 1996.  Renewal  premiums  increased 15.2
percent in 1997 to $25,966,323.  Group policy revenue increased $289,280 or 13.9
percent, to $2,366,645 in 1997. In 1996, group policy revenue decreased $232,219
to $2,077,365  from  $2,309,584 in 1995.  The 1995 group policy  revenue  amount
included  $449,000  in  premium  tax  loads  added  to the  premium  charged  on
structured  settlements.  This  charge  was no longer  assessed  by the  Company
beginning in 1996 as the Pennsylvania premium tax on non-qualified annuities was
repealed in 1996.

                                       114

<PAGE>
INCORPORATED BY REFERENCE, PAGES 15 AND 16 OF THE COMPANY'S 1997 ANNUAL
                      REPORT TO SHAREHOLDERS


First-year and single  universal life and annuity  deposits were  $50,675,240 in
1997,  $50,651,063 in 1996 and $57,606,715 in 1995.  Total annuity and universal
life deposits were  $69,040,378,  $67,716,398  and $74,541,897 in 1997, 1996 and
1995,  respectively.  Generally,  lower market  interest  rates and a flattening
interest  yield  curve in 1997 and 1996 made  fixed  annuities  less  attractive
compared to other savings alternatives.  Annuity deposits recorded in connection
with annuity  contracts  purchased by the Erie Insurance Group  Retirement Plan
for retired vested Employees receiving benefits were $1,992,060, $4,894,042 and
$6,024,125 for the years ended December 31, 1997,  1996 and 1995,  respectively.
Also  included  in  annuity  deposits  are  annuities  purchased  by  affiliated
property/casualty companies for use in connection with the structured settlement
of  insurance  claims.  Structured  settlement  annuity  deposits  sold  to Erie
Insurance  Group  affiliate  companies  totaled  $17,780,582,   $13,504,953  and
$22,018,313 in 1997, 1996 and 1995, respectively.

Investment Income, Net of Expenses

Net investment  income in 1997 was  $49,914,292  compared to $45,948,969 in 1996
and  $40,962,812 in 1995, an increase of 8.6 percent in 1997 and 12.2 percent in
1996.  The ratio of net  investment  income to mean  invested  assets  increased
slightly  during  1997 to 7.5  percent,  compared to 7.4 percent in 1996 and 7.8
percent  in 1995.  The  majority  of the  increase  in income  generated  by the
investment  portfolio was due to increased  levels of investment from cash flows
generated by the Company's operations and annuity and universal life deposits.

Realized Gain on Investments

During 1997, 1996 and 1995, the Company generated  realized gains of $5,201,365,
$4,986,897 and $7,483,798,  respectively, from the sale of equity securities and
fixed maturity  investments.  Net gains from the sale of equity  securities were
$4,289,507 in 1997,  $4,534,697 in 1996 and  $5,855,110 in 1995.  Net gains from
the  sale or  maturity  of  fixed  maturities  totaled  $911,858,  $452,200  and
$1,628,688 in 1997, 1996 and 1995, respectively.


BENEFITS AND EXPENSES

Death Benefits

Net death benefits on life insurance  policies increased 14.7 percent in 1997 to
$11,117,175, compared to $9,688,242 in 1996 and $7,438,758 in 1995. The increase
in death  benefits is greater  than the 11.5 percent  increase in the  Company's
life  insurance  in force in 1997.  However,  mortality  experience  needs to be
analyzed   over  the   long-term,   rather  than  short  periods  where  unusual
fluctuations  may  influence  the  results.  From 1992 through  1997,  net death
benefits increased by about 133 percent,  consistent with the 130 percent growth
in the  Company's  life  insurance in force,  over the same  period.  Management
believes that its underwriting philosophy and practices are sound.


                                       115
<PAGE>
INCORPORATED BY REFERENCE, PAGE 16 OF THE COMPANY'S 1997 ANNUAL
                      REPORT TO SHAREHOLDERS


Interest on Annuity and Universal Life Deposits

Total  interest  credited on deposits  increased  11.6 percent to $31,585,629 in
1997 from  $28,299,828 in 1996. This increase in interest  expense was primarily
due to new annuity and  universal  life  deposits of  $69,040,378  received from
Policyholders  during  1997.  At December 31, 1997,  annuity  deposits  accruing
interest were $489  million,  an increase of 8.6 percent from December 31, 1996,
and universal life deposits accruing  interest were $69 million,  an increase of
21.2 percent from  December 31, 1996.  The interest  rate  credited on universal
life  deposits  ranges from 6.25 percent to 7.00  percent.  The rate credited on
annuity deposits ranges from 5.00 percent to 6.25 percent.

Surrender and Other Benefits

Surrender  and  other  benefits   include  life  surrender   benefits,   matured
endowments,  disability benefits,  interest on death benefits and changes in the
Company's share of the Pennsylvania Employees Group Life Insurance (PEGLI) pool.
PEGLI is a voluntary reinsurance pool which insures Commonwealth of Pennsylvania
employees upon their  retirement.  The plan is  administered by the CIGNA group,
which provides  information to determine each company's share of pool assets and
liabilities on a yearly basis. During 1997, the change in the Company's share of
the PEGLI pool caused a decrease in benefits of $904,897  compared to a decrease
of $66,559 in 1996.  The change in the Company's  share of the PEGLI pool cannot
be predicted  prior to receiving the year end report.  Also  during 1997,  life
surrender  benefits  increased  $90,188  or  12.3  percent, to  $824,086.  These
fluctuations resulted in a decrease in surrender and other benefits of $744,156,
or 71.0 percent, to $303,318 in 1997.

Increase in Future Life Policy Benefits

The liability for future life policy  benefits is computed  considering  various
factors such as anticipated mortality, future investment yields, withdrawals and
anticipated  credit for  reinsurance.  The 1997  increase  in future life policy
benefits was $4,538,298,  compared to $4,549,404 in 1996 and $4,619,996 in 1995.
In 1997, the future policy benefit  additions due to increased life insurance in
force were offset by  increased  credits for  reinsurance  and  increases in the
policy lapse rate.  This resulted in a future life policy benefit that decreased
slightly from the amount reported in 1996.

Amortization of Deferred Policy Acquisition Costs

Generally,  the costs  incurred  by the Company to acquire  business,  including
underwriting,  commission  and  bonus  costs,  are  deferred.  These  costs  are
amortized and charged  against  earnings  over the premium  paying period of the
related policies in proportion to the ratio of the annual premium revenue to the
total  anticipated   premium  revenue.   The  amortization  of  deferred  policy
acquisition  costs  (DAC)  increased  17.6  percent to  $3,694,966  in 1997 from
$3,141,350 in 1996. The growth in  amortization  expense was affected by changes
in premium revenue patterns and by an increase in the policy lapse rate.

Commissions

Direct commission costs include new and renewal commissions,  production bonuses
and company  contest  awards.  These direct  commission  expenses are reduced by
commissions  received from  reinsurers and the expense is affected by the amount
of commission  expenses  capitalized as part of the DAC. Commission costs, which
vary with and are related primarily to the production of new business, have been
deferred and are capitalized as DAC. Most  first-year and bonus  commissions and
some second-year  commissions  qualify for deferral i.e.,  additions to the DAC.
These costs are being  amortized  over the premium  paying period of the related
policies in proportion to the ratio of the annual  premium  revenue to the total
anticipated premium revenue.

                                       116
<PAGE>
INCORPORATED BY REFERENCE, PAGE 17 OF THE COMPANY'S 1997 ANNUAL
                      REPORT TO SHAREHOLDERS


Total ordinary commissions, which include first year and renewal commissions and
production  bonuses,  net of  applicable  deferrals  increased $373,466, or 12.6
percent, in 1997.  This  increase  is in line with the 13.1  percent increase in
policy revenues in 1997 when compared to 1996.

Company  contests include trips awarded to Agents for reaching certain levels of
production. In 1996, the Company participated in the Erie Insurance Group travel
incentive  program  "California  Dreamin'."  The estimated  contest costs to the
Company net of deferrals were charged to commission expense in 1996.

Commission  reimbursements  from ceded reinsurance  contracts have been deducted
from  the  commission  expense  paid to  agents.  These  reimbursements  totaled
$1,462,295 in 1997, $1,367,873 in 1996 and $1,272,530 in 1995.

General Expenses

General  expenses  amounted to $6,358,610 in 1997 compared to $5,839,795 in 1996
and $5,802,088 in 1995.  General expenses  include wages and salaries,  employee
benefits,  data  processing  expenses,  occupancy  expenses and other office and
general administrative expenses of the Company.  Certain general expenses of the
Company are deferred as policy acquisition  costs,  including medical inspection
and exam fees related to new business production,  wages,  salaries and Employee
benefits of underwriting  personnel,  and bonuses paid to branch sales Employees
for the  production  of life and  annuity  business.  Operating  expenses of the
Company  are  paid by Erie  Indemnity  Company  and  reimbursed  monthly  by the
Company.   The  portion  of  Erie  Insurance  Group  common  overhead   expenses
attributable to the Company are also reimbursed monthly. These expenses comprise
the majority of the Company's general expenses.

Taxes, Licenses and Fees

Taxes,  licenses and fees decreased $199,013 to $1,470,584 in 1997. The decrease
was due to  decreased  assessments  made by the state  life  insurance  guaranty
associations.  Statutory  assessments totaled $234,000 in 1997, $707,000 in 1996
and  $1,251,000  in 1995.  The  assessments  are used by the various  state life
insurance  guaranty  associations  to  guarantee  the life,  annuity  and health
insurance  policies of companies that have become  insolvent.  About $200,000 of
the 1997  assessments,  $2,000 of the 1996  assessments and $340,000 of the 1995
assessments  can be  recovered  as credits on the  Company's  state  premium tax
returns.  These credits generally have remained available but are not guaranteed
by the states.

In 1991,  the  Pennsylvania  legislature  enacted a law that imposed a 2 percent
premium  tax on all  non-qualified  annuity  premiums.  This tax  increased  the
Company's premium taxes by $686,000 in 1995. On June 30, 1995,  Pennsylvania Act
21-1995 was signed into law which  repealed the tax on  non-qualified  annuities
effective January 1, 1996.


LIQUIDITY AND CAPITAL RESOURCES

GENERAL CONSIDERATIONS & ANALYSIS

Liquidity is a measure of the  Company's  ability to secure  enough cash to meet
its contractual obligations and operating needs.  Generally,  insurance premiums
are  collected  prior to claims and  benefit  disbursements  and these funds are
invested to provide  necessary cash flows in future years.  The Company's  major
sources of cash from  operations  are life  insurance  premiums  and  investment
income.  The net positive cash flow is used to fund Company  commitments  and to
build the investment portfolio,
                                       117
<PAGE>
INCORPORATED BY REFERENCE, PAGES 17 AND 18 OF THE COMPANY'S 1997 ANNUAL
                      REPORT TO SHAREHOLDERS


thereby  increasing  future investment  returns.  Net cash provided by operating
activities  in 1997  was  $14,963,909,  compared  to  $14,480,503  in 1996,  and
$8,297,378 in 1995. The Company's  liquidity position remains strong as invested
assets  increased  by 7.5 percent  during 1997 to $703  million at December  31,
1997. The majority of invested assets are liquid marketable securities.

Annuity  and  universal  life  deposits,  which do not  appear as revenue on the
financial statements, provide cash. These deposits do not involve a mortality or
morbidity  risk and are  accounted  for using  methods  applicable to comparable
"interest-bearing  obligations" of other types of financial  institutions.  This
method of  accounting  records  deposits as a liability  rather than as revenue.
Annuity  and  universal  life  deposits   received  were  $69,040,378  in  1997,
$67,716,398 in 1996 and $74,541,897 in 1995.

The Company's commitments for expenditures as of December 31, 1997 are primarily
for policy death benefits, policy surrenders and withdrawals,  general operating
expenses,  federal income taxes,  dividends to  shareholders  and the new policy
administration system,  described below. These commitments are met by cash flows
from policy revenue,  annuity and universal life deposits and investment income.
Management  believes  its cash flow from  operations  and its liquid  assets and
marketable  securities,  will  enable  the  Company  to  meet  foreseeable  cash
requirements.  As an added measure of liquidity,  the Company has in place a $10
million line of credit with a bank.  There were no borrowings under this line in
1997, 1996 or 1995.

The  Company  is in the  process  of  replacing  its  life  and  annuity  policy
administration  systems with a new  state-of-the  art system.  Expenditures  for
computer hardware, software, technical and user training, project administration
and  consulting  will be incurred in  connection  with this  project.  The total
future  cost of this  project as of  December  31,  1997 will be in excess of $2
million.

During 1994 Pennsylvania adopted the NAIC Model Actuarial Opinion and Memorandum
Regulation.  As a result, the Company's actuarial opinion for each year includes
the results of an asset adequacy analysis, based primarily on cash flow testing.
The testing consisted of 20-year  projections of existing business under each of
nine different  interest rate scenarios.  The projected  annual gains and market
value surplus results were positive under all nine scenarios.

REGULATORY CONSIDERATIONS

Risk-Based Capital

The Commonwealth of Pennsylvania has adopted the statutory  accounting practices
(SAP) minimum risk-based capital  requirements for domestic insurance  companies
that were  developed by the  National  Association  of  Insurance  Commissioners
(NAIC).  The formulas for determining  the amount of risk-based  capital specify
various  weighing  factors  that are  applied to  financial  balances or various
levels  of  activity  based on the  perceived  degree  of risk.  These  formulas
determine a ratio of the  Company's  regulatory  total  adjusted  capital to its
authorized control level risk-based capital,  as defined by the NAIC.  Companies
below specific  trigger points or ratios are classified  within certain  levels,
each of which requires specified corrective action. The levels and ratios are as
follows:

                                  Ratio of Total Adjusted Capital to
  NAIC                            Authorized Control Level Risk-Based
  Regulatory Event                Capital (Less than or Equal to)

Company action level              2.0 (or 2.5 with negative trends)
Regulatory action level           1.5
Authorized control level          1.0
Mandatory control level           0.7

                                           118
<PAGE>
INCORPORATED BY REFERENCE, PAGES 18 AND 19 OF THE COMPANY'S 1997 ANNUAL
                      REPORT TO SHAREHOLDERS


The Company had regulatory  total adjusted capital of $91 million and a ratio of
total adjusted capital to authorized  control level risk-based capital of 6:1 at
December 31, 1997,  levels which exceed,  by a substantial  margin,  the minimum
risk-based capital requirements.

Surplus Note

On December  29, 1995, a surplus note in the amount of $15 million was issued by
the Company in  accordance  with  Section  322.1 of the  Pennsylvania  Insurance
Company Law of 1921 as amended by the Act of December 18, 1992, P.L. 792 No. 178
(40 P.S.  ss.445.1) to the Erie Indemnity  Company for $15 million.  Interest on
this note is charged at an annual rate of 6.45 percent.

Notwithstanding  any other  provision  in this  note,  no  payment of all or any
portion  of the  principal  amount  of this  note  may be  demanded  by the Erie
Indemnity Company prior to December 31, 2005,  provided that the Company may pay
upon ten (10) days' prior  written  notice to the Erie  Indemnity  Company,  the
interest  on, all or any  portion  of the  principal  of,  this note at any time
without  premium  or  penalty,  subject to the prior  consent  of the  Insurance
Commissioner  of  the   Commonwealth  of  Pennsylvania   (the   "Commissioner").
Commencing on December 31, 2005, the outstanding  principal balance of this note
(including  all  accrued  interest)  shall be  repayable  on  demand by the Erie
Indemnity  Company or under such terms as the Erie Indemnity  Company may elect,
subject to the prior consent of the Commissioner to such repayment in accordance
with the provisions of law. Payment of principal and/or interest is subordinated
to payment of all other liabilities of the Company.

Dividend Restrictions

The amount of dividends Erie Family Life, a Pennsylvania-domiciled life insurer,
can pay to its  shareholders  without  the prior  approval  of the  Pennsylvania
Insurance  Commissioner  is limited by statute to the greater of: (a) 10 percent
of its statutory  surplus as regards  policyholders  as shown on its last annual
statement on file with the  commissioner,  or (b) the net income as reported for
the period  covered by such  annual  statement,  but shall not  include pro rata
distributions  of any class of the insurer's own  securities.  Accordingly,  the
maximum  dividend  payout which may be made in 1998 without  prior  Pennsylvania
commissioner   approval  is  $12,924,000.   Dividends  to  shareholders  totaled
$5,103,008 in 1997.


FINANCIAL CONDITION

RESERVE LIABILITIES

The Company's primary commitment is its obligation to meet the payment of future
policy benefits under the terms of its life insurance and annuity contracts.  To
meet these future  obligations,  the Company establishes life insurance reserves
based upon the type of policy,  the age of the  insured  and the number of years
the policy has been in force. The Company also establishes annuity and universal
life reserves  based on the amount of  Policyholder  deposits  (less  applicable
policy charges) plus interest  earned on those  deposits.  On December 31, 1997,
there was no material  difference  between the carrying  value and fair value of
the  Company's  investment-type  policies.  These  life  insurance  and  annuity
reserves  are  supported  primarily  by the  Company's  long-term,  fixed income
investments as the underlying  policy reserves are generally also of a long-term
nature.

                                       119

<PAGE>
INCORPORATED BY REFERENCE, PAGE 19 OF THE COMPANY'S 1997 ANNUAL
                      REPORT TO SHAREHOLDERS


INVESTMENTS

The Company's  investment  strategies are designed and portfolios are structured
to match the features of the life  insurance  and annuity  products  sold by the
Company.   Annuities  and  life  insurance  policies  are  long-term   products;
therefore,  the  Company's  investment  strategy  takes a long-term  perspective
emphasizing investment quality, diversification and superior investment returns.
The Company's  investments are managed prudently on a total return approach that
focuses on capital appreciation and current income.

At  December  31,  1997,  the  Company's   investment  portfolio  consisting  of
marketable  short-term  investments,  investment-grade  bonds, common stocks and
preferred  stocks  totaled $718 million or 86.3 percent of total  assets.  These
resources  provide  the  liquidity  the  Company  requires  to  meet  known  and
unforeseen  demands on its funds.  At December 31,  1997,  79.4 percent of total
invested assets were invested in fixed  maturities.  Preferred  stocks represent
13.2  percent or $93  million  and common  stocks  represent  4.0 percent or $28
million of total  invested  assets at December 31,  1997,  while real estate and
mortgage loans make up only 1.7 percent of total invested assets.  Mortgage loan
and real estate investments have the potential for higher returns but also carry
more risk,  including less liquidity and greater  uncertainty of rate of return.
Consequently,  these  investments  have been kept to a minimum.  Invested assets
consisted of the following:

                                                        Invested Assets
                                                        (In Thousands)
                                                            December 31,
                                                        1997          1996

Fixed Maturities
         Available-for-Sale                          $558,177       $515,530
Equity Securities
         Preferred Stock                               92,502        110,566
         Common Stock                                  28,340          5,986
Real Estate                                             1,624          1,710
Mortgage Loans                                         10,050          8,956
Policy Loans                                            5,100          4,382
Other Invested Assets                                   7,240          6,787
                                                   -----------     ----------
  Total invested assets                              $703,033       $653,917

Fixed Maturities

The Company's fixed maturities  consist  principally of investments in bonds. It
is the Company's  objective  that the fixed  maturity  portfolio be of very high
quality and well diversified within each market sector. The portfolio is managed
conservatively  with the goal of achieving  reasonable  returns  while  limiting
exposure to risk.


                                       120
<PAGE>
INCORPORATED BY REFERENCE, PAGE 20 OF THE COMPANY'S 1997 ANNUAL
                      REPORT TO SHAREHOLDERS


Diversification of Fixed Maturities
at December 31, 1997
<TABLE>
<CAPTION>

                                      Amortized                Unrealized        Unrealized          Carrying
                                        Cost                     Gains             Losses              Value
(In Thousands)
<S>                                   <C>                     <C>               <C>                 <C>
U.S. Treasuries                       $   4,268               $     543         $       0           $   4,811
U.S. Government
  agency                                 27,519                     728               302              27,945
States and political
  subdivisions                            2,058                     155                 0               2,213
Special revenue                          14,210                   1,106                 0              15,316
Public utilities                         80,491                   3,097               842              82,746
U. S. banks, trusts and
  insurance companies                    99,820                   6,051               287             105,584
U. S. industrial and
  miscellaneous                         285,565                  12,661               636             297,590
Foreign governments-
  agency                                  2,988                       0               641               2,347
Foreign banks, trusts
  and insurance
  companies                               5,000                      99                 0               5,099
Foreign industrial
  and miscellaneous                      13,874                     652                 0              14,526
                                      ---------               ---------         ---------           ---------

Total Fixed Maturities                $ 535,793               $  25,092         $   2,708           $ 558,177
                                      =========               =========         =========           =========
</TABLE>


Fixed maturity  investments  consist of  high-quality,  marketable  bonds,  99.2
percent or $554 million of which are rated at  investment-grade  levels (Baa/BBB
or better). Included in this investment-grade category are $351 million of bonds
characterized as of the "highest"  quality or "Class 1" securities as defined by
the NAIC.  Below  investment-grade  category consist of $4.4 million of "medium"
quality  bonds.  None of the  bonds are  considered  "low"  quality.  All of the
securities  classified  as  below-investment-grade   are  current  and  in  good
standing.  Generally,  the fixed maturity  securities in the Company's portfolio
are rated by external rating agencies.  If not externally  rated, they are rated
by the Company on a basis consistent with the basis used by the rating agencies.

Management   believes   that   having  all  fixed   maturities   classified   as
available-for-sale securities will allow the Company to meet its liquidity needs
and  provide  greater  flexibility  for its  investment  managers  to respond to
changes in market conditions or strategic  direction.  Securities  classified as
available-for-sale  are carried at market value with unrealized gains and losses
included in  shareholders'  equity.  At December  31, 1997 and 1996,  unrealized
gains  on  fixed  maturities  available-for-sale  amounted  to  $14,550,150  and
$3,836,632, respectively, net of deferred taxes.

                                       121

<PAGE>
INCORPORATED BY REFERENCE, PAGES 20 AND 21 OF THE COMPANY'S 1997 ANNUAL
                      REPORT TO SHAREHOLDERS


Equity Securities

Equity securities consist of common and nonredeemable preferred stocks which are
carried on the statements of financial position at market value. At December 31,
1997,  common and  nonredeemable  preferred  stock held by the  Company  had net
unrealized  gains  of  $9,054,999.  As with the bond  portfolio,  the  Company's
nonredeemable  preferred stock portfolio provides a source of highly predictable
current income that is very competitive with high-grade bonds.  These securities
are well diversified within each market sector and support the investment return
provided to Policyholders.  The nonredeemable  preferred stocks are of very high
quality and extremely marketable,  95.2 percent or $88.1 million of which are of
the "highest" or "high"  quality,  as defined by the NAIC.  The  remaining  $4.4
million of nonredeemable preferred stocks have a "medium" NAIC rating. There are
no  nonredeemable  preferred stocks in Erie Family Life's portfolio rated in the
"low," "lowest," or "in or near default" quality  categories  established by the
NAIC.

Diversification of Equity Securities
at December 31, 1997
<TABLE>
<CAPTION>

                                                              Unrealized         Unrealized           Carrying
                                    Actual Cost                 Gains              Losses               Value
(In Thousands)
<S>                                   <C>                      <C>              <C>                  <C>
Common stock:
  U. S. Banks, trusts
    and insurance
    companies                         $     731                $    209         $      0             $     940
  U. S. Industrial and
    miscellaneous                        27,648                   3,116            3,364                27,400
Preferred stock:
  Public utilities                        4,000                      50                0                 4,050
  U. S. Banks, trusts
    and insurance
    companies                            55,302                   7,003              122                62,183
  U. S. Industrial and
    miscellaneous                        12,441                   1,815               15                14,241
  Foreign banks,
    trusts and insurance
    companies                             7,765                     365              162                 7,968
  Foreign industrial
    and miscellaneous                     3,900                     160                0                 4,060
                                      ---------                --------         --------             ---------

Total Equity Securities               $ 111,787                $ 12,718          $  3,663             $ 120,842
                                      =========                ========         ========             =========
</TABLE>

Other Investments

Real estate  investments  are carried on the statement of financial  position at
cost, less allowances for depreciation and possible losses.  Commercial mortgage
loans  on real  estate  are  carried  at their  unpaid  balances,  adjusted  for
amortization  of premium or discount,  less allowances for possible loan losses.
Policy loans are carried at their unpaid balances.

The fair values of the Company's  investments  in real estate,  mortgage  loans,
policy loans and other invested assets approximate the book values presented in
the financial statements.

At December 31, 1997, the Company did not own any derivative securities.

                                       122
<PAGE>
INCORPORATED BY REFERENCE, PAGES 21 AND 22 OF THE COMPANY'S 1997 ANNUAL
                      REPORT TO SHAREHOLDERS


MANAGEMENT CHANGES

Philip A. Garcia was appointed  Executive  Vice  President  and Chief  Financial
Officer of the Erie  Insurance  Group on October 2, 1997.  Mr.  Garcia  replaced
Thomas M. Sider, who retired June 30, 1997 after 26 years of service to the Erie
Insurance  Group.  Mr.  Garcia began his career with the Company in 1981 and has
held several positions in the life and  property/casualty  accounting operations
since that time. Immediately prior to his appointment,  Mr. Garcia had served as
senior vice president and controller of the Company for the past four years.

The Company's former internal audit manager,  Timothy G. NeCastro, was appointed
Senior Vice President and Controller of the Erie Insurance Group on November 10,
1997.


FACTORS WHICH MAY AFFECT FUTURE RESULTS

INVESTMENT OPERATIONS

The Company's  portfolio of fixed maturities and equity securities is subject to
the ongoing  risks  associated  with  fluctuations  in interest  rates and stock
market conditions in general.  Current  investment results may not be indicative
of performance in future periods.

REGULATORY

Federal action begun in 1997 could  culminate in significant  changes in the way
insurance companies, banks and securities firms are regulated in the future. The
elimination of some regulatory  barriers to banks entering the insurance  market
and the interjection of Federal  governmental  regulation into the traditionally
state-regulated  insurance industry could  dramatically  change the ground rules
under which  insurance  products  are  marketed.  Further  action and  advancing
technology  will likely  influence  the way the  property  and casualty and life
insurance industries distribute, price and service their products.


YEAR 2000

Financial  services  companies like Erie Family Life are largely  dependent upon
information  technology in conducting  their  day-to-day  operations.  Like many
companies,  Erie Family Life is continually  faced with substantial  information
technology  challenges.  Among  these  challenges  is the  so-called  "Year 2000
Issue",  the inability of many  computer  systems to recognize the year 2000 and
subsequent years.

The Company is in the process of addressing its technology challenges, including
the Year 2000 Issue,  by replacing  virtually all of its current  administration
systems (some of which are not Year 2000  compliant)  with the Cyberlife  policy
administration  system.  Cyberlife is a state-of-the-art,  relational  database,
client/server system that will provide support for all of the Company's life and
annuity products. The client/server  architecture will enhance significantly the
Company's  ability  to provide  prompt  and  efficient  customer  service  while
streamlining a wide range of  administrative  processes.  The system  supports a
full range of life and  annuity  products,  which  will  improve  the  Company's
ability to develop and introduce new products.

                                       123

<PAGE>
INCORPORATED BY REFERENCE, PAGE 22 OF THE COMPANY'S 1997 ANNUAL
                      REPORT TO SHAREHOLDERS


The Company's plans are to have Cyberlife fully installed and operational by the
end of 1998 and all policy data converted to Cyberlife in 1999.

In addition to those systems operated by the Company,  systems resident with our
major  service   providers  are  of  a  concern  to   maintaining   ongoing  and
uninterrupted  service.  The Company's plans address these external  concerns by
assessing  the  readiness of outside  parties and  considering  alternatives  in
situations in which any more than remote exposure might exist.  During 1998, the
Company also is continuing  its  assessment  of the ability of external  service
providers to provide mission critical service to the Company.


MARKET FOR THE REGISTRANT'S
COMMON STOCK AND RELATED SHAREHOLDER MATTERS

Currently  there is no market on which the  Registrant's  stock is  traded.  The
Company had 1,145 shareholders of common stock on December 31, 1997.

The Company's Board of Directors approved a three-for-one (3 for 1) split of its
common stock on May 2, 1996.

   Date Dividends Declared                Dividends per Share Declared

    February 29, 1996                                .125*
    May 1, 1996                                      .125*
    June 17, 1996                                    .125
    September 17, 1996                               .125
    March 5, 1997                                    .135
    April 29, 1997                                   .135
    June 17, 1997                                    .135
    September 15, 1997                               .135

*Adjusted to reflect three-for-one stock split effective May 2, 1996.

"Safe Harbor"  Statement Under the Private  Securities  Litigation Reform Act of
1995:  Statements  contained herein expressing the beliefs of management such as
those  contained  in  the  "Benefits  and  Expenses",   "Liquidity  and  Capital
Resources",  "Investments",  "Factors Which May Affect Future Results",  and the
"Year 2000" sections  hereof,  and the other statements which are not historical
facts  contained in this report,  are forward  looking  statements  that involve
risks and  uncertainties.  These  risks and  uncertainties  include  but are not
limited  to:  legislative,  judicial,  and  regulatory  changes,  the  impact of
competitive  products and pricing,  product  development,  geographic  spread of
risk,  catastrophic events, better (or worse) mortality rates, securities market
fluctuations and technological difficulties and advancements.

                                       124
<PAGE>
INCORPORATED BY REFERENCE, PAGE 23 OF THE COMPANY'S 1997 ANNUAL
                      REPORT TO SHAREHOLDERS


GLOSSARY OF SELECTED INSURANCE TERMS


Annuity - Contract  which  provides  for a series of fixed or variable  periodic
payments from a stated or contingent date for a specified period,  such as for a
number of years or for life. The consideration for an annuity may be paid over a
period of time or in a lump sum.

Carrying Value - The amount  reported for an asset or liability in the financial
statements in conformity with generally accepted accounting  principles ("GAAP")
or  statutory  accounting  practices  ("SAP"),  whichever is  applicable  in the
circumstances.

Deferred Policy  Acquisition  Costs (DAC) - The costs of acquiring new business,
principally  commissions  and  certain  costs  of  issuing  policies,  including
underwriting,  salaries and medical examinations, all of which vary with and are
related primarily to the production of new business. Under GAAP, these costs are
deferred and amortized over the premium paying period on the related policies in
proportion to the ratio of the annual premium  revenue to the total  anticipated
premium revenue.

Future Policy  Benefits - Liabilities  established on a GAAP basis whose minimum
levels are established to adequately provide for benefits  ultimately payable to
policyholders.

Interest  Rate  Credited - Interest  rate  applied  to funds  accumulated  under
annuity and universal life contracts,  whether  guaranteed or currently declared
by the insurer.

In Force - Total amount of  insurance  coverage or number of policies or annuity
contracts that are in effect.

Independent  Agents -  Independent  contractors  who  represent one or more
insurers and are licensed to sell the insurers' products.

National  Association of Insurance  Commissioners (NAIC) - An association of the
top regulatory officials of all 50 states and the District of Columbia organized
to  promote  consistency  of  regulatory   practices  and  statutory  accounting
practices throughout the United States.

Premiums  - Money  paid  by the  policyholder  to an  insurance  company  for an
insurance policy or annuity.

Statutory Accounting  Practices (SAP) - SAP provides for recording  transactions
and preparing  financial  statements in accordance with the rules and procedures
prescribed  or  permitted  by state  statute  or  regulatory  authorities.  Such
practices  generally reflect a liquidating  rather than a going concern basis of
accounting. The principal differences between SAP and GAAP are as follows:

(a) under SAP,  certain assets  ("nonadmitted"  assets) are eliminated  from the
statements of financial  position;  (b) under SAP, policy  acquisition costs are
expensed as incurred, while under GAAP, they are deferred and amortized over the
premium paying period of the related  policies sold; (c) under SAP, no provision
is made for  deferred  income  taxes and (d) under  SAP,  certain  reserves  are
recognized which are not recognized for GAAP.

Statutory  Surplus - Statutory  Surplus is the excess of assets over liabilities
and capital, as determined in accordance with statutory accounting practices.

                                       125
<PAGE>


                       Index to Graphs included in the Investment Section
                          of The Management's Discussion and Analysis

Graph #1               DISTRIBUTION OF INVESTED ASSETS
                                    at December 31, 1997            
                                                                     

                       Fixed Maturities - Available For Sale        79.4%
                       Preferred Stocks                             13.2%
                       Common Stocks                                 4.0%
                       Mortgage Loans                                1.5%
                       Other Invested Assets                         1.0%
                       Policy Loans                                  0.7%
                       Real Estate                                   0.2%


Graph #2               DIVERSIFICATION OF FIXED MATURITIES
                         at December 31, 1997 - Carrying/Market Value

                       U.S. Industrial & Miscellaneous                 53.3%
                       U.S. Banks, Trusts and Insurance Companies      18.9%
                       Public Utilities                                14.8%
                       U.S. Government & Treasuries                     5.9%
                       Foreign                                          3.9%
                       Special Revenue                                  2.8%
                       States & Political Subdivision                   0.4%



Graph #3                      QUALITY*  OF BOND PORTFOLIO
                                      Carrying/Market Value

                          A/A            $251.2 Million                 45.0%
                        Baa/BBB          $147.7 Million                 26.5%
                         Aa/AA            $85.5 Million                 15.3%
                        Aaa/AAA           $69.4 Million                 12.4%
                         Ba/BB             $4.4 Million                  0.8%

        * As rated by Standard & Poor's or Moody's Investor's Service, Inc.


Graph #4               DIVERSIFICATION OF EQUITY SECURITIES
                         at December 31, 1997 - Carrying/Market Value


                       (2) U.S. Banks & Insurance                   51.4%
                       (1) U.S. Industrial & Miscellaneous          22.7%
                       (2) U.S. Industrial & Miscellaneous          11.8%
                       (2) Foreign Banks & Insurance                 6.6%
                       (2) Foreign Industrial & Miscellaneous        3.4%
                       (2) Public Utilities                          3.3%
                       (1) U.S. Banks & Insurance                    0.8%


                       (1)  Common Stock
                       (2)  Preferred Stock
 
                                       126
<PAGE>
INCORPORATED BY REFERENCE, PAGE 24 OF THE COMPANY'S 1997 ANNUAL
                       REPORT TO SHAREHOLDERS                          



               INDEPENDENT AUDITORS' REPORT


To the Board of Directors and Shareholders
Erie Family Life Insurance Company
Erie, Pennsylvania

We have audited the accompanying statements of financial position of Erie Family
Life  Insurance  Company  as of  December  31,  1997 and 1996,  and the  related
statements of operations,  shareholders'  equity, and cash flows for each of the
three years in the period ended December 31, 1997.  These  financial  statements
are the  responsibility of the Company's  management.  Our  responsibility is to
express an opinion on these financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the  financial  position of Erie Family Life  Insurance
Company as of December 31, 1997 and 1996,  and the results of its operations and
its cash flows for each of the three years in the period ended December 31, 1997
in conformity with generally accepted accounting principles.




/s/ Brown Schwab Bergquist & Co.




Erie, Pennsylvania
February 17, 1998


                                       127
<PAGE>
INCORPORATED BY REFERENCE, PAGE 26 OF THE COMPANY'S 1997 ANNUAL
                       REPORT TO SHAREHOLDERS                     


                       ERIE FAMILY LIFE INSURANCE COMPANY

                        STATEMENTS OF FINANCIAL POSITION
                        As of December 31, 1997 and 1996
<TABLE>
<CAPTION>


   ASSETS                                                                                  1997                    1996
                                                                                       ------------            ------------
<S>                                                                                    <C>                     <C>
Investments
  Fixed maturities available-for-sale,
    at fair value (amortized cost of
    $535,792,641 and $509,627,188,
    respectively)                                                                      $558,177,487            $515,529,699
  Equity securities, at fair value
    (cost of $111,786,894 and
    $111,463,042, respectively)                                                         120,841,893             116,552,145
  Real estate                                                                             1,624,306               1,710,329
  Policy loans                                                                            5,099,671               4,381,657
  Real estate mortgage loans                                                             10,049,733               8,955,760
  Other invested assets                                                                   7,240,282               6,787,226
                                                                                       ------------            ------------

          Total investments                                                            $703,033,372            $653,916,816

Cash and cash equivalents                                                                42,287,398               6,284,102
Premiums receivable from policyholders                                                    3,471,385               2,974,305
Reinsurance recoverable                                                                     350,837                 212,583
Other receivables                                                                           182,711                 567,216
Accrued interest and dividends                                                           10,273,259               9,792,095
Deferred policy acquisition costs                                                        64,567,085              58,026,428
Reserve credit for reinsurance ceded                                                      5,041,530               4,199,907
Prepaid federal income taxes                                                                146,984                       0
Other assets                                                                              3,179,302               4,677,208
                                                                                       ------------            ------------

          Total assets                                                                 $832,533,863            $740,650,660
                                                                                       ============            ============
</TABLE>

                                       128

<PAGE>
INCORPORATED BY REFERENCE, PAGE 26 OF THE COMPANY'S 1997 ANNUAL
                       REPORT TO SHAREHOLDERS                             





<TABLE>
<CAPTION>

   LIABILITIES AND SHAREHOLDERS' EQUITY                                          1997                      1996
                                                                             -------------             ------------
<S>                                                                           <C>                      <C>
LIABILITIES
  Policy liabilities and accruals:
    Future life policy benefits                                               $ 59,413,782             $ 54,033,860
    Policy and contract claims                                                   2,049,677                1,703,105
    Annuity deposits                                                           489,444,701              450,570,003
    Universal life deposits                                                     68,890,312               56,856,590
    Supplementary contracts not
      including life contingencies                                                 825,927                  839,258
  Other policyholder funds                                                       6,595,330                5,763,271
  Current federal income taxes
    payable                                                                              0                  686,353
  Deferred income taxes                                                         24,409,317               15,614,492
  Reinsurance premium due                                                          424,745                  203,198
  Accounts payable and accrued
    expenses                                                                     2,668,688                4,519,782
  Note payable to affiliate                                                     15,000,000               15,000,000
  Due to affiliate                                                               1,156,431                1,049,007
  Dividends payable                                                              1,275,752                1,181,252
                                                                              ------------             ------------

                  Total liabilities                                           $672,154,662             $608,020,171
                                                                              ------------             ------------


SHAREHOLDERS' EQUITY
  Common stock, $.40 par value
    per share; authorized
    15,000,000 shares;
    9,450,000 shares issued
    and outstanding                                                           $  3,780,000             $  3,780,000
  Additional paid-in capital                                                       630,000                  630,000
  Net unrealized gain
    on available-for-sale securities,
    net of deferred taxes of $11,003,944
    and $3,847,065, respectively                                                20,435,901                7,144,549
  Retained earnings                                                            135,533,300              121,075,940
                                                                              ------------             ------------

                  Total shareholders' equity                                  $160,379,201             $132,630,489
                                                                              ------------             ------------

                  Total liabilities and
                    shareholders' equity                                      $832,533,863             $740,650,660
                                                                              ============             ============
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>

                                       129
<PAGE>
INCORPORATED BY REFERENCE, PAGE 25 OF THE COMPANY'S 1997 ANNUAL
                       REPORT TO SHAREHOLDERS                              


                                         ERIE FAMILY LIFE INSURANCE COMPANY

                                              STATEMENTS OF OPERATIONS
                                    Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>

                                                              1997                   1996                   1995
                                                          -----------            -----------            -----------
<S>                                                       <C>                    <C>                    <C>
Revenues
  Policy
    Life premiums                                         $32,826,827            $29,038,797            $25,764,413
    Group                                                   2,366,645              2,077,365              2,309,584
                                                          -----------            -----------            -----------

                  Total policy
                    revenue                               $35,193,472            $31,116,162            $28,073,997

  Investment income, net
    of expenses                                            49,914,292             45,948,969             40,962,812
  Realized gains on
    investments                                             5,201,365              4,986,897              7,483,798
  Other income                                                728,269                668,210                556,814
                                                          -----------            -----------            -----------

                  Total revenues                          $91,037,398            $82,720,238            $77,077,421
                                                          -----------            -----------            -----------

Benefits and expenses
  Death benefits                                          $11,117,175            $ 9,688,242            $ 7,438,758
  Interest on annuity
    deposits                                               27,663,157             25,108,877             22,718,786
  Interest on universal
    life deposits                                           3,922,472              3,190,951              2,628,397
  Surrender and other
    benefits                                                  303,318              1,047,474                721,412
  Increase in future life
    policy benefits                                         4,538,298              4,549,404              4,619,996
  Amortization of deferred
    policy acquisition
    costs                                                   3,694,966              3,141,350              2,358,127
  Commissions                                               1,765,563              1,841,861              1,531,798
  General expenses                                          6,358,610              5,839,795              5,802,088
  Taxes, licenses
    and fees                                                1,470,584              1,669,597              2,854,187
                                                          -----------            -----------            -----------

                  Total benefits
                    and expenses                          $60,834,143            $56,077,551            $50,673,549
                                                          -----------            -----------            -----------

                  Income from
                    operations                            $30,203,255            $26,642,687            $26,403,872
                                                          -----------            -----------            -----------

Federal income taxes
  Current                                                 $ 9,004,943            $ 5,378,656            $ 7,607,573
  Deferred                                                  1,637,944              3,597,781                914,707
                                                          -----------            -----------            -----------

                  Total federal
                    income taxes                          $10,642,887            $ 8,976,437            $ 8,522,280
                                                          -----------            -----------            -----------

                  Net income                              $19,560,368            $17,666,250            $17,881,592
                                                          ===========            ===========            ===========

                  Net income per
                    share                                 $      2.07            $      1.87            $      1.89
                                                          ===========            ===========            ===========
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>

                                       130
<PAGE>
INCORPORATED BY REFERENCE, PAGE 28 OF THE COMPANY'S 1997 ANNUAL
                       REPORT TO SHAREHOLDERS              


                                         ERIE FAMILY LIFE INSURANCE COMPANY

                                         STATEMENTS OF SHAREHOLDERS' EQUITY
                                    Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>

                                                                        Net
                                                                     Unrealized                                       Net
                                             Additional              Gain (Loss)                                     Share-
                            Common            Paid-In                    on                 Retained                holders'
                             Stock            Capital                Securities             Earnings                 Equity
<S>                      <C>                <C>                   <C>                    <C>                    <C>
Balance at
 January 1,
 1995                     $3,780,000         $630,000             ($ 8,091,525)           $ 94,537,106           $ 90,855,581

 Net income                                                                                 17,881,592             17,881,592
 Net unrealized
  gains on
  available-
  for-sale
  securities                                                        24,452,229                                     24,452,229
 Dividends
  declared,
  $.453 per
  share                                                                                  (   4,284,000)         (   4,284,000)
                          ----------         --------              -----------            ------------           ------------

Balance at
 December 31,
 1995                     $3,780,000         $630,000              $16,360,704            $108,134,698           $128,905,402

 Net income                                                                                 17,666,250             17,666,250
 Net unrealized
  losses on
  available-
  for-sale
  securities                                                      (  9,216,155)                                  (  9,216,155)
 Dividends
  declared,
  $.50 per
  share                                                                                  (   4,725,008)         (   4,725,008)
                          ----------         --------              -----------            ------------           ------------

Balance at
 December 31,
 1996                     $3,780,000         $630,000              $ 7,144,549            $121,075,940           $132,630,489

 Net income                                                                                 19,560,368             19,560,368
 Net unrealized
  gains on
  available-
  for-sale
  securities                                                        13,291,352                                     13,291,352
 Dividends
  declared,
  $.54 per
  share                                                                                  (   5,103,008)         (   5,103,008)
                          ----------         --------              -----------            ------------           ------------

Balance at
 December 31,
 1997                     $3,780,000         $630,000              $20,435,901            $135,533,300           $160,379,201
                          ==========         ========              ===========            ============           ============

<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>

                                       131
<PAGE>
INCORPORATED BY REFERENCE, PAGE 27 OF THE COMPANY'S 1997 ANNUAL
                       REPORT TO SHAREHOLDERS                                


                       ERIE FAMILY LIFE INSURANCE COMPANY

                            STATEMENTS OF CASH FLOWS
                  Years Ended December 31, 1997, 1996 and 1995

<TABLE>
<CAPTION>

                                                                      1997                    1996                    1995
                                                                  ------------            ------------            -----------
      <S>                                                         <C>                     <C>                    <C>
      CASH FLOWS FROM OPERATING ACTIVITIES
       Net income                                                  $19,560,368             $17,666,250            $17,881,592
       Adjustments to reconcile
        net income to net cash
        provided by operating
        activities:
         Net amortization of
          bond and mortgage
          premium and discount                                       1,294,213                 733,881                129,922
         Amortization of deferred
          policy acquisition
          costs                                                      3,694,966               3,141,350              2,358,127
         Real estate depreciation                                       86,023                  86,066                102,233
         Deferred federal
          income taxes                                               1,637,944               3,597,781                914,707
         Realized gains on
          investments                                             (  5,201,365)           (  4,986,897)          (  7,483,798)
       Increase in premiums
        receivable                                                (    497,080)           (    272,727)          (    400,857)
       Decrease (increase) in
        other receivables                                              384,505            (    312,542)                 6,904
       Increase in accrued
        investment income                                         (    481,164)           (    747,959)          (    655,835)
       Deferred policy
        acquisition costs                                         ( 10,235,623)           ( 10,405,486)          (  8,168,624)
       Decrease (increase) in
        other assets                                                 1,497,906            (  1,667,895)          (  1,017,015)
       Increase in reinsurance
        receivables and reserve
        credits                                                   (    979,877)           (    662,786)          (     51,832)
       Increase in future life
        policy benefits and
        claims                                                       5,726,494               6,071,200              4,818,105
       Increase (decrease) in
        other policyholder funds                                       832,059                 524,374           (  1,113,579)
       Increase (decrease) in
        reinsurance premium due                                        221,547            (    157,280)               167,343
       (Decrease)increase  in
        federal income taxes
        currently payable                                         (    833,337)                424,882              1,112,791
       (Decrease)increase  in
        accounts payable and
        due to affiliate                                          (  1,743,670)              1,448,291            (   302,806)
                                                                   -----------             -----------             ----------
          Net cash provided by
            operating activities                                   $14,963,909             $14,480,503            $ 8,297,378
                                                                   -----------             -----------            -----------


<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>

                                        132
<PAGE>
INCORPORATED BY REFERENCE, PAGE 27 OF THE COMPANY'S 1997 ANNUAL
                       REPORT TO SHAREHOLDERS                                


                       ERIE FAMILY LIFE INSURANCE COMPANY

                      STATEMENTS OF CASH FLOWS - CONTINUED
                  Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>

                                                                 1997                    1996                    1995
                                                             ------------            ------------            -----------
<S>                                                         <C>                     <C>                    <C>

CASH FLOWS FROM INVESTING ACTIVITIES
 Purchase of investments:
  Fixed maturities                                          ($76,210,662)           ($149,403,614)         ($119,758,853)
  Equity securities                                         ( 38,955,248)           (  18,394,580)         (  40,995,932)
  Mortgage loans                                            (  1,222,745)           (   2,752,196)                     0
 Sales/maturities of investments:
  Fixed maturities                                            49,662,504               41,270,911             60,191,905
  Equity securities                                           42,920,903               37,128,238             37,486,994
 Principal payments received
  on mortgage loans                                              129,123                1,026,426                572,056
 Loans made to policyholders                                (  1,373,918)           (   1,317,369)          (    999,584)
 Payments received on
  policy loans                                                   655,904                  630,242                486,365
 Purchase of other invested assets                          (    856,802)           (   3,170,391)          (  2,510,832)
 Proceeds from other invested assets                             403,747                  478,885                602,254
                                                             -----------             ------------            -----------

    Net cash used in
     investing activities                                   ($24,847,194)           ($ 94,503,448)          ($64,925,627)
                                                             -----------             ------------            -----------

CASH FLOWS FROM FINANCING ACTIVITIES
 Increase in annuity
  deposits and
  supplementary contracts                                    $38,861,367             $ 45,189,708            $64,209,943
 Increase in universal
  life deposits                                               12,033,722               10,884,748              9,864,440
 Borrowed money                                                        0                        0             15,000,000
 Dividends paid to
  shareholders                                              (  5,008,508)           (   4,614,756)          (  4,158,000)
                                                             -----------             ------------            -----------

    Net cash provided by
     financing activities                                    $45,886,581             $ 51,459,700            $84,916,383
                                                             -----------             ------------            -----------

Net increase (decrease) in cash
 and cash equivalents                                        $36,003,296            ($ 28,563,245)           $28,288,134
Cash and cash equivalents at
 beginning of year                                             6,284,102               34,847,347              6,559,213
                                                             -----------             ------------            -----------
Cash and cash equivalents at
 end of year                                                 $42,287,398             $  6,284,102            $34,847,347
                                                             ===========             ============            ===========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Cash paid during the
    year for:
    Interest                                                  $  967,500             $    971,154            $       632
    Income taxes                                              $9,838,280             $  4,953,774            $ 6,494,782

<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>

                                       133
<PAGE>
INCORPORATED BY REFERENCE, PAGE 29 OF THE COMPANY'S 1997 ANNUAL
                       REPORT TO SHAREHOLDERS                           


                      ERIE FAMILY LIFE INSURANCE COMPANY

                         NOTES TO FINANCIAL STATEMENTS
                        December 31, 1997, 1996 and 1995


NOTE 1.  NATURE OF BUSINESS

                Erie  Family  Life   Insurance   Company   (the   Company)   was
                incorporated  in the  Commonwealth  of  Pennsylvania  on May 23,
                1967. The Company is engaged in the business of underwriting and
                selling  nonparticipating  individual  and group life  insurance
                policies,  including  universal life and annuity  products.  The
                Company markets its products through independent agents in eight
                states  and  the   District  of  Columbia   and  is  subject  to
                supervision  and  regulations  of the  states  in  which it does
                business.  A majority  of the  Company's  business is written in
                Pennsylvania, Ohio, Maryland and Virginia.

                The Erie Family Life Insurance  Company is owned 21.6% by the
                Erie Indemnity Company and 52.2% by the Erie Insurance Exchange.

                The Erie Indemnity Company (EIC) is the attorney-in-fact for the
                Erie Insurance  Exchange  (Exchange).  Operating expenses of the
                Company are paid by EIC. The Company  reimburses  EIC for direct
                expenses  and its share of common  expenses.  The  Company  also
                sells  a  significant  amount  of  annuities  to its  affiliated
                companies of the Erie Insurance Group.

NOTE 2.  SIGNIFICANT ACCOUNTING POLICIES


              Basis of presentation

                The  accompanying  financial  statements  have been  prepared in
                conformity with generally  accepted  accounting  principles that
                differ  from  statutory   accounting   practices  prescribed  or
                permitted for insurance companies by regulatory authorities.

              Reclassifications

                Certain  amounts   reported  in  the  1996  and  1995  financial
                statements  have been  reclassified  to conform  to the  current
                year's financial statement presentation.

              Use of estimates

                The  preparation  of financial  statements  in  conformity  with
                generally accepted accounting  principles requires management to
                make estimates and assumptions  that affect the reported amounts
                of assets and  liabilities  and disclosure of contingent  assets
                and liabilities at the date of the financial  statements and the
                reported  amounts of revenues and expenses  during the reporting
                period. Actual results could differ from those estimates.


                                       134
<PAGE>
INCORPORATED BY REFERENCE, PAGE 29 OF THE COMPANY'S 1997 ANNUAL
                       REPORT TO SHAREHOLDERS                                 


                               NOTES TO FINANCIAL STATEMENTS


NOTE 2.  SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

              Investments

                 Fixed   maturities   and  marketable   equity   securities  are
                 classified as  available-for-sale.  Equity  securities  consist
                 primarily of common and  nonredeemable  preferred  stocks while
                 fixed  maturities   consist  of  bonds,  notes  and  redeemable
                 preferred  stock.  Available-for-sale  securities are stated at
                 fair value,  with the unrealized gains and losses,  net of tax,
                 reported as a separate component of shareholders' equity. There
                 are  no  securities   classified  as  "trading"  securities  or
                 "held-to-maturity" securities.

                 Premiums and discounts on  investments  in debt  securities are
                 amortized over their contractual lives.

                 Realized  gains and losses on sales of  investments,  including
                 losses from declines in value of specific securities determined
                 by management  to be  other-than-temporary,  are  recognized in
                 income on the  specific  identification  method.  Interest  and
                 dividend income is recorded as earned.

                 Mortgage loans on commercial real estate are recorded at unpaid
                 balances,  adjusted for amortization of premium or discount.  A
                 valuation   allowance  is  provided  for   impairment   in  net
                 realizable  value based on periodic  valuations.  The change in
                 the  allowance  is  reflected  on the income  statement  in net
                 realized gain on investments.

                 Other  invested  assets  (primarily  investments in real estate
                 limited  partnerships)  are recorded under the equity method of
                 accounting.

              Financial instruments

                Fair values of available-for-sale securities are based on quoted
                market  prices,  where  available,  or  dealer  quotations.  The
                carrying value of short-term financial instruments  approximates
                fair  value  because  of  the   short-term   maturity  of  these
                instruments.  The carrying value of receivables  and liabilities
                arising in the ordinary  course of business  approximates  their
                fair values.


              Premium revenues and losses

                Premiums on traditional life insurance contracts are reported as
                earned revenue when due. Reserves for future policy benefits are
                established  as premiums  are  earned.  For  universal  life and
                annuity  contracts,  deposits  are  recorded  in a  policyholder
                account  which  is   classified  as  a  liability.   Revenue  is
                recognized  as amounts are  assessed  against  the  policyholder
                account for mortality coverage and contract expenses.


                                       135
<PAGE>
INCORPORATED BY REFERENCE, PAGE 29 OF THE COMPANY'S 1997 ANNUAL
                       REPORT TO SHAREHOLDERS                              


                     NOTES TO FINANCIAL STATEMENTS


NOTE 2.  SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

              Deferred policy acquisition costs

                 The costs of acquiring  new business,  principally  commissions
                 and certain costs of issuing policies,  including  underwriting
                 costs and medical examinations,  all of which vary with and are
                 primarily related to the production of new business,  have been
                 deferred. For traditional life insurance, these costs are being
                 amortized  over  the  premium  paying  period  of  the  related
                 policies in proportion to the total anticipated premium revenue
                 stream.  Anticipated  premium  revenue was estimated  using the
                 same  assumptions  as were used for computing  liabilities  for
                 future  policy  benefits.  The  amount of costs to be  deferred
                 would be reduced  to the  extent  future  policy  premiums  and
                 anticipated investment income would not exceed related costs.

                 Universal life and annuity deferred acquisition costs are being
                 amortized in relation to the present value of estimated  future
                 gross profits on the contracts over a 20-year period.

                 Policy acquisition costs are summarized as follows:
<TABLE>
<CAPTION>

                                                                  1997                   1996                   1995
                                                               -----------            -----------            -----------
                         <S>                                  <C>                    <C>                    <C>
                         Balance at
                          beginning
                          of year                              $58,026,428            $50,762,292            $44,951,795
                         Additions                              10,235,623             10,405,486              8,168,624
                         Amortization                         (  3,694,966)          (  3,141,350)          (  2,358,127)
                                                               -----------            -----------            -----------

                         Balance at end
                          of year                              $64,567,085            $58,026,428            $50,762,292
                                                               ===========            ===========            ===========
</TABLE>

              Insurance liabilities

                 Liabilities for life insurance and income-paying annuity future
                 policy  benefits have been computed  primarily by the net level
                 premium method with  assumptions  as to anticipated  mortality,
                 withdrawals,  lapses and investment  yields.  Deferred  annuity
                 future policy  benefit  liabilities  have been  established  at
                 accumulated  values  without  reduction for surrender  charges.
                 Reserves for universal life and investment  contracts are based
                 on the contract account balance,  if future benefit payments in
                 excess  of the  account  balance  are  not  guaranteed,  or the
                 present value of future benefit payments when such payments are
                 guaranteed. Variations are inherent in such calculations due to
                 the estimates and  assumptions  necessary in the  calculations.
                 Interest  rate  assumptions  for  non-interest  sensitive  life
                 insurance  range from 3.5% to 4% on policies issued in 1980 and
                 prior  years  and 6% to 7.25% on  policies  issued  in 1981 and
                 subsequent  years.  Mortality and  withdrawal  assumptions  are
                 based on tables typically used in the industry.

                 Annuities are credited with varying  interest rates  determined
                 at the discretion of the Company  subject to certain  minimums.
                 During 1997,  annuity deposits earned interest at rates ranging
                 from  5.00% to 6.25%.  Management  believes  the fair  value of
                 annuity and universal  life deposits  approximates  the amounts
                 recorded in the financial  statements,  since these obligations
                 are generally subject to fluctuating interest rates.


                                       136
<PAGE>
INCORPORATED BY REFERENCE, PAGES 29 AND 30 OF THE COMPANY'S 1997 ANNUAL
                       REPORT TO SHAREHOLDERS                               


                        NOTES TO FINANCIAL STATEMENTS


NOTE 2.  SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

              Reinsurance

                 The  Statements of Operations  are reflected net of reinsurance
                 activities.  Gross  revenue and benefits and expenses  incurred
                 are  reduced  for  amounts   expected  to  be  recovered  under
                 reinsurance agreements.  Reinsurance  transactions are recorded
                 "gross" on the Statement of Financial Position.

              Income taxes

                 Provisions for income taxes include  deferred  taxes  resulting
                 from changes in cumulative  temporary  differences  between the
                 tax  bases  and  financial   statement   bases  of  assets  and
                 liabilities.  Deferred taxes are provided on a liability method
                 whereby  deferred  tax assets  are  recognized  for  deductible
                 temporary   differences   and  deferred  tax   liabilities  are
                 recognized  for taxable  temporary  differences.  Deferred  tax
                 assets and  liabilities are adjusted for the effects of changes
                 in tax laws and rates on the date of enactment.

              Earnings per share

                 Earnings per share  amounts are based on the  weighted  average
                 number  of  common  shares   outstanding  during  each  of  the
                 respective years.

              Cash equivalents

                  The Company considers all highly liquid investments  purchased
                  with an original  maturity of three  months or less to be cash
                  equivalents.  Carrying amounts  approximate fair value because
                  of the short maturity of these investments.

              Liability for guaranty fund assessments

                  The Company may be  required,  under the  solvency or guaranty
                  laws of the  various  states in which it is  licensed,  to pay
                  assessments  up to  prescribed  limits  to  fund  policyholder
                  losses  or  liabilities  of  insolvent  insurance   companies.
                  Certain states permit these assessments, or a portion thereof,
                  to  be  recovered  as  an  offset  to  future  premium  taxes.
                  Assessments are recognized  based on notification of liability
                  by  regulatory  authorities,  including  provision for certain
                  future  amounts  payable,  and, when subject to credit against
                  future  premium  taxes and  judged to be  recoverable,  may be
                  capitalized  and  amortized  on a basis  consistent  with  the
                  credits to be realized under applicable state law.

              Recent accounting standards

                 In June 1997, the Financial  Accounting  Standards Board (FASB)
                 issued  Statement of Financial  Accounting  Standards (FAS) No.
                 130, "Reporting Comprehensive Income". FAS 130 is effective for
                 fiscal  years  beginning  after  December 31, 1997 and requires
                 reporting   of   comprehensive   income   in  a  full   set  of
                 general-purpose  financial statements.  Comprehensive income is
                 defined in the  Statement  as all  changes  in equity  during a
                 period except those  resulting  from  investments by owners and
                 distributions  to owners.  The Company will continue to display
                 an amount  for net  income  and,  in  addition,  an amount  for
                 comprehensive  income  beginning  with the quarter ending March
                 31, 1998.

                                       137
<PAGE>
INCORPORATED BY REFERENCE, PAGE 30 OF THE COMPANY'S 1997 ANNUAL
                       REPORT TO SHAREHOLDERS                               


                         NOTES TO FINANCIAL STATEMENTS


NOTE 3.  INVESTMENTS

              The  following  tables  summarize  the  cost and  market  value of
              available-for-sale  securities at December 31, 1997 and 1996 based
              on  current  year  classifications.  Prior year data may have been
              categorized   differently   to  the   extent   of   current   year
              classification changes.

             
<TABLE>
<CAPTION>
                                                     Available-for-Sale Securities
                                          Amortized                Unrealized             Unrealized           Estimated
                                             Cost                     Gains                  Losses            Fair Values
(In Thousands)
December 31, 1997
<S>                                          <C>                       <C>                     <C>              <C>
Fixed Maturities:
U. S. Treasuries                             $  4,268                  $   543                 $    0           $  4,811
U. S. Government
 agency                                        27,519                      728                    302             27,945
States and political
 subdivisions                                   2,058                      155                      0              2,213
Special revenue                                14,210                    1,106                      0             15,316
Public utilities                               80,491                    3,097                    842             82,746
U. S. banks, trusts and
 insurance companies                           99,820                    6,051                    287            105,584
U. S. industrial and
 miscellaneous                                285,565                   12,661                    636            297,590
Foreign governments-
 agency                                         2,988                        0                    641              2,347
Foreign banks, trusts
 and insurance
 companies                                      5,000                       99                      0              5,099
Foreign industrial
 and miscellaneous                             13,874                      652                      0             14,526
                                             --------                  -------                 ------           --------

Total fixed
 maturities                                  $535,793                  $25,092                 $2,708           $558,177
                                             ========                  =======                 ======           ========

Equity Securities:
Common stock:
 U. S. banks, trusts
  and insurance
  companies                                  $    731                  $   209                 $    0           $    940 
 U. S. Industrial and
  miscellaneous                                27,648                    3,116                  3,364             27,400

Preferred stock:
 Public utilities                               4,000                       50                      0              4,050
 U. S. banks, trusts
  and insurance
  companies                                    55,302                    7,003                    122             62,183
 U. S. industrial and
  miscellaneous                                12,441                    1,815                     15             14,241
 Foreign banks, trusts
  and insurance
  companies                                     7,765                      365                    162              7,968
 Foreign industrial
  and miscellaneous                             3,900                      160                      0              4,060
                                             --------                  -------                 ------           --------

Total equity
 securities                                  $111,787                  $12,718                 $3,663           $120,842
                                             ========                  =======                 ======           ========

Total available-for-
 sale securities                             $647,580                  $37,810                 $6,371           $679,019
                                             ========                  =======                 ======           ========
</TABLE>

                                       138
<PAGE>
INCORPORATED BY REFERENCE, PAGE 30 OF THE COMPANY'S 1997 ANNUAL
                       REPORT TO SHAREHOLDERS                                 


                          NOTES TO FINANCIAL STATEMENTS


NOTE 3.  INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>

                                                  Available-for-Sale Securities
                                           Amortized                Unrealized             Unrealized           Estimated
                                             Cost                     Gains                  Losses            Fair Values
(In Thousands)
December 31, 1996
<S>                                          <C>                       <C>                     <C>                <C>
Fixed Maturities:
U. S. Treasuries                             $  4,274                  $   286                 $    0             $  4,560
U. S. Government
 agency                                        30,823                      677                    804               30,696
States and political
 subdivisions                                   2,063                      203                      0                2,266
Special revenue                                19,242                      827                    132               19,937
Public utilities                               88,626                    2,076                  1,534               89,168
U. S. banks, trusts
 and insurance
 companies                                     80,064                    2,128                    501               81,691
U. S. industrial
 and miscellaneous                            271,626                    5,745                  3,616              273,755
Foreign governments-
 agency                                         2,986                        0                     16                2,970
Foreign industrial
 and miscellaneous                              9,923                      564                      0               10,487
                                             --------                  -------                 ------             --------

Total fixed
 maturities                                  $509,627                  $12,506                 $6,603             $515,530
                                             ========                  =======                 ======             ========


Equity Securities:
Common stock:
 U. S. industrial and
  miscellaneous                              $  5,500                  $   491                 $    5             $  5,986
Preferred stock:
 Public utilities                               4,000                        0                     60                3,940
 U. S. banks, trusts and
  insurance companies                          75,797                    3,686                    488               78,995
 U. S. industrial and
  miscellaneous                                16,441                    1,363                      0               17,804
 Foreign banks, trusts  
  and insurance
  companies                                     5,825                      180                    138                5,867
 Foreign industrial
  and miscellaneous                             3,900                       60                      0                3,960
                                             --------                  -------                 ------             --------

Total equity
 securities                                  $111,463                  $ 5,780                 $  691             $116,552
                                             ========                  =======                 ======             ========

Total available-for-
 sale securities                             $621,090                  $18,286                 $7,294             $632,082
                                             ========                  =======                 ======             ========
</TABLE>


                                       139
<PAGE>
INCORPORATED BY REFERENCE, PAGE 30 OF THE COMPANY'S 1997 ANNUAL
                       REPORT TO SHAREHOLDERS                               


                        NOTES TO FINANCIAL STATEMENTS


NOTE 3.  INVESTMENTS (CONTINUED)

                The    following    is   a   summary    of   fixed    maturities
                available-for-sale  at December 31, 1997,  by remaining  term to
                contractual maturity:
<TABLE>
<CAPTION>

                                                                                     Amortized                Estimated
                                                                                       Cost                  Fair Values
                                                                                               (In Thousands)
                  <S>                                                                  <C>                      <C>
                  Due in one year or less                                              $  4,511                 $  4,511
                  Due after one year through five years                                  68,964                   69,121
                  Due after five years through ten years                                120,285                  121,942
                  Due after ten years                                                   342,033                  362,603
                                                                                       --------                 --------

                                                                                       $535,793                 $558,177
                                                                                       ========                 ========
</TABLE>

                Bonds  having a fair value of  $1,976,000  at December  31, 1997
                were on deposit with various regulatory  authorities as required
                by  law.  Fixed  maturities  (bonds)  having  a  fair  value  of
                $14,689,000  are pledged as collateral on a $10,000,000  line of
                credit with a bank. There were no borrowings  outstanding on the
                line as of December 31, 1997.

                Net  unrealized   gains  and  losses  on  investments  in  fixed
                maturities available-for-sale and equity securities are credited
                to or charged directly against shareholders' equity. At December
                31,  1997,   net  unrealized   gains  on  these   securities  of
                $20,435,901  consisted of $37,810,426  in unrealized  gains less
                $6,370,581   in   unrealized   losses  and  deferred   taxes  of
                $11,003,944.












                                       140

<PAGE>
INCORPORATED BY REFERENCE, PAGE 31 OF THE COMPANY'S 1997 ANNUAL
                       REPORT TO SHAREHOLDERS                                


                      NOTES TO FINANCIAL STATEMENTS


NOTE 3.  INVESTMENTS (CONTINUED)

                Realized   gains  and  losses  for  fixed   maturity  or  equity
                securities were as follows for the years ended December 31:
<TABLE>
<CAPTION>

                                                                            1997                1996             1995
                                                                         ----------         ----------        ----------
                <S>                                                      <C>                <C>               <C>

                Realized gains:
                  Fixed maturities                                       $1,264,129         $  778,043        $3,339,981
                  Equity securities                                       4,465,757          4,910,984         6,633,652
                                                                         ----------         ----------        ----------
                                                                         $5,729,886         $5,689,027        $9,973,633
                                                                         ----------         ----------        ----------

                Realized losses:
                  Fixed maturities                                       $  352,271         $  325,843        $1,711,293
                  Equity securities                                         176,250            376,287           778,542
                                                                         ----------         ----------        ----------
                                                                         $  528,521         $  702,130        $2,489,835
                                                                         ----------         ----------        ----------

                Net realized gain on
             Investments                                                 $5,201,365         $4,986,897        $7,483,798
                                                                         ==========         ==========        ==========
</TABLE>

                Changes in unrealized  gains include the following for the years
ended December 31:
<TABLE>
<CAPTION>

                                                                  1997                    1996                   1995
                                                               -----------            -----------            -----------
                <S>                                           <C>                    <C>                    <C>  

                Equity securities                              $ 3,965,896            $ 4,528,256            $ 8,580,049
                Fixed maturities
                 available-for-sale                             16,482,335           ( 18,706,955)            26,799,457
                Transferred to
                 available-for-sale
                 securities                                              0                      0              2,239,307
                Deferred federal
                 income taxes                                 (  7,156,879)             4,962,544           ( 13,166,584)
                                                               -----------            -----------            -----------

                  Increase (decrease)
                   in unrealized
                   gains                                       $13,291,352           ($ 9,216,155)           $24,452,229
                                                               ===========            ===========            ===========
</TABLE>

                Investment income consists of the following:
<TABLE>
<CAPTION>

                                                                   1997                   1996                   1995
                                                               -----------            -----------            -----------
                <S>                                           <C>                    <C>                    <C>    

                Interest                                       $41,723,007            $36,755,946            $31,160,233
                Dividends                                        8,942,415             10,168,153             10,033,662
                Other                                              662,141                423,120                464,892
                Less expenses                                 (  1,413,271)          (  1,398,250)          (    695,975)
                                                               -----------            -----------            -----------

                                                               $49,914,292            $45,948,969            $40,962,812
                                                               ===========            ===========            ===========
</TABLE>


                                       141

<PAGE>
INCORPORATED BY REFERENCE, PAGE 31 OF THE COMPANY'S 1997 ANNUAL
                       REPORT TO SHAREHOLDERS                                


                        NOTES TO FINANCIAL STATEMENTS


NOTE 4.         LIABILITY FOR UNPAID POLICY AND CONTRACT CLAIMS

                Activity in the liability for unpaid policy and contract  claims
is as follows:
<TABLE>
<CAPTION>

                                                                      1997                  1996                 1995
                                                                   ----------            ----------           ----------
                <S>                                               <C>                   <C>                  <C>
                Balance at January 1                               $ 1,703,105           $  897,026           $  797,485
                Less reinsurance
                 recoverables                                     (    132,971)         (   135,597)         (   112,203)
                Less unpaid matured
                 endowments                                                  0          (    16,370)                   0
                                                                    ----------           ----------           ----------

                Net balance at January 1                           $ 1,570,134           $  745,059           $  685,282

                Total death claims
                 incurred                                           11,117,175            9,688,242            7,438,758
                Total death claims paid,
                  net of reinsurance
                  recoveries                                        10,800,180            8,863,167            7,378,981
                                                                   -----------           ----------           ----------

                Net balance at
                 December 31                                       $ 1,887,129           $1,570,134           $  745,059
                Plus reinsurance
                 recoverables                                          162,548              132,971              135,597
                Plus unpaid matured
                 endowment                                                   0                    0               16,370
                                                                   -----------           ----------           ----------

                Balance at December 31                             $ 2,049,677           $1,703,105           $  897,026
                                                                   ===========           ==========           ==========
</TABLE>


NOTE 5.         LIFE PREMIUMS AND ANNUAL ANNUITY & UNIVERSAL LIFE DEPOSITS

                Premiums on life insurance contracts and deposits on annuity and
                universal life contracts are summarized as follows:
<TABLE>
<CAPTION>

                                                                  1997                   1996                   1995
                                                               -----------            -----------            -----------
                         <S>                                   <C>                    <C>                    <C>
                         Life insurance
                         premiums:
                          First year                           $ 6,860,504            $ 6,505,484            $ 5,624,117
                          Renewal                               25,966,323             22,533,313             20,140,296
                                                               -----------            -----------            -----------

                                                               $32,826,827            $29,038,797            $25,764,413
                                                               ===========            ===========            ===========

                         Annuity & universal
                          life deposits, net
                          of loading:
                          First year
                           and single                          $50,675,240            $50,651,063            $57,606,715
                          Renewal                               18,365,138             17,065,335             16,935,182
                                                               -----------            -----------            -----------

                                                               $69,040,378            $67,716,398            $74,541,897
                                                               ===========            ===========            ===========
</TABLE>

                                        142

<PAGE>
INCORPORATED BY REFERENCE, PAGE 31 OF THE COMPANY'S 1997 ANNUAL
                       REPORT TO SHAREHOLDERS                                


                           NOTES TO FINANCIAL STATEMENTS


NOTE 5.         LIFE PREMIUMS AND ANNUAL ANNUITY & UNIVERSAL LIFE DEPOSITS
                (CONTINUED)

                Annuity  deposits in 1997,  1996 and 1995  included  $1,992,060,
                $4,894,042 and $6,024,125,  respectively, of deposits on annuity
                contracts  purchased by the Erie Insurance Group Retirement Plan
                for Employees. Structured settlement annuities sold to affiliate
                property and  casualty  companies  of the Erie  Insurance  Group
                totaled $17,780,582,  $13,504,953 and $22,018,313, in 1997, 1996
                and 1995, respectively.


NOTE 6.         FEDERAL INCOME TAXES

                A reconciliation  of the provision for income taxes with amounts
                determined by applying the statutory federal income tax rates to
                pre-tax income is as follows:
<TABLE>
<CAPTION>

                                                                      1997                  1996                 1995
                                                                   ----------            ----------           ----------
                <S>                                               <C>                   <C>                  <C>  
                Federal income taxes
                 at statutory rates                                $10,571,139           $9,324,940           $9,241,355
                Dividends received
                 deduction and
                 tax-exempt interest                              (    298,866)         (   772,484)         (   437,130)
                Other                                                  370,614              423,981          (   281,945)
                                                                    ----------           ----------           ----------

                Income tax expense                                 $10,642,887           $8,976,437           $8,522,280
                                                                   ===========           ==========           ==========
</TABLE>

                Temporary  differences  between the financial statement carrying
                amounts and tax bases of assets and liabilities  which give rise
                to deferred tax liabilities are as follows:
<TABLE>
<CAPTION>

                                                                                                  December 31,
                                                                                         1997                   1996
                                                                                      -----------            -----------
                <S>                                                                   <C>                    <C>
                Deferred policy acquisition costs                                     $19,563,458            $17,613,507
                Liability for future life and
                 annuity policy benefits                                               (7,217,765)            (6,739,570)
                Unrealized gains                                                       11,003,944              3,847,065
                Other                                                                   1,059,680                893,490
                                                                                      -----------            -----------

                Deferred tax liability                                                $24,409,317            $15,614,492
                                                                                      ===========            ===========
</TABLE>


NOTE 7.         RELATED PARTY TRANSACTIONS

                Expense reimbursements

                   Operating  expenses of the Company are paid by EIC and common
                   expenses are allocated.  Reimbursements  are made to EIC on a
                   monthly  basis.  The amount of these  reimbursements  for the
                   Company totaled  $13,038,000,  $10,095,000 and $10,231,000 in
                   1997, 1996 and 1995, respectively.

                   The Employees of the Company  participate  in the pension and
                   other  Employee  benefit plans of EIC. The benefits are based
                   on years of service and salary.  Pension  costs are funded by
                   EIC in amounts  sufficient  to at least  meet  ERISA  minimum
                   funding   requirements.   Pension  and  other  benefit  costs
                   allocated  to the  Company  equaled  $182,624,  $166,965  and
                   $203,699 in 1997, 1996 and 1995, respectively.

                                        143
<PAGE>
INCORPORATED BY REFERENCE, PAGES 31 AND 32 OF THE COMPANY'S 1997 ANNUAL
                       REPORT TO SHAREHOLDERS                                 


                     NOTES TO FINANCIAL STATEMENTS


NOTE 7.         RELATED PARTY TRANSACTIONS (CONTINUED)

                Annuities purchased by affiliates

                   The  Erie  Insurance   Group   affiliated   property/casualty
                   insurance companies  periodically purchase annuities from the
                   Company  in  connection  with the  structured  settlement  of
                   claims.  Also, the Erie Insurance  Group  Retirement Plan for
                   Employees  purchases from the Company  individual  annuities
                   for  some  terminated   vested   Employees  or  beneficiaries
                   receiving  benefits  (excluding  disabled and deferred vested
                   participants).  These are non-participating annuity contracts
                   under  which the Company has  unconditionally  contracted  to
                   provide  specified  benefits to beneficiaries in return for a
                   fixed  premium  from  the  plan.   Annuity  deposit  balances
                   outstanding  relating to pension  annuities  sold to the Erie
                   Insurance   Group   Retirement   Plan  are   $33,672,000  and
                   $32,812,000 at December 31, 1997 and 1996, respectively.  The
                   reserves held for structured settlement annuities sold to the
                   affiliated   property/casualty   insurance   companies  equal
                   $111,219,000  and  $94,096,000 at December 31, 1997 and 1996,
                   respectively. See also Note 5.

                Note payable to EIC

                   The Company issued a surplus note to EIC for $15,000,000. The
                   note bears an annual  interest rate of 6.45% and all payments
                   of interest and  principal of the note may be repaid only out
                   of unassigned surplus of the Company and are subject to prior
                   approval of the Pennsylvania Insurance Commissioner. Interest
                   on the surplus note is  scheduled  to be paid  semi-annually.
                   The note will be payable on demand on or after  December  31,
                   2005.  During 1997 and 1996, the Company paid interest to EIC
                   totaling $967,500.

                Rental income

                   The Company  owns  certain real estate which it leases to EIC
                   for rentals of $423,120 per year  through  December 31, 2000.
                   The real estate is recorded net of  accumulated  depreciation
                   of $1,196,441  and  $1,110,419 at December 31, 1997 and 1996,
                   respectively.


NOTE 8.  REINSURANCE

                The Company  cedes  insurance to other  insurers and  reinsurers
                under  various   contracts   (typically  under  excess  of  loss
                contracts)  which  cover  individual  risks.  These  reinsurance
                arrangements  minimize  losses  arising from large risks or from
                hazards of an unusual nature.

                Amounts recoverable or credited under reinsurance  contracts are
                included in total assets as reinsurance  recoverable or credited
                for  reinsurance  ceded.  The  cost of  reinsurance  related  to
                long-duration  contracts is  accounted  for over the life of the
                reinsured policies using assumptions  consistent with those used
                to account for the underlying policies.

                A  contingent  liability  exists  with  respect  to  reinsurance
                receivables and the reserve credit for  reinsurance  ceded which
                would become a liability in the event such reinsurance companies
                are  unable  to  meet  their   obligations  under  the  existing
                reinsurance  agreements.  These  agreements  do not  relieve the
                Company of its primary obligation to its Policyholders.


                                       144
<PAGE>
INCORPORATED BY REFERENCE, PAGE 32 OF THE COMPANY'S 1997 ANNUAL
                       REPORT TO SHAREHOLDERS                               


                        NOTES TO FINANCIAL STATEMENTS


NOTE 8.         REINSURANCE (CONTINUED)

                Policy  revenues,   benefits  and  expenses   reflected  in  the
                Statements  of  Operations  have been  reduced by the  following
                amounts due to reinsurance cessions:
<TABLE>
<CAPTION>

                                                                   1997                   1996                   1995
                                                                ----------             ----------             ----------
                <S>                                             <C>                    <C>                    <C>

                Policy revenue                                  $3,760,595             $3,634,876             $3,354,484

                Death benefits                                   1,318,963              1,846,353              1,040,858

                Future life policy
                 benefits                                          841,623                715,717                 98,567

                Commissions                                      1,462,295              1,367,873              1,272,530
</TABLE>

                The Company has an insignificant  amount of  reinsurance-assumed
                activity.

NOTE 9.         STATUTORY NET INCOME and SHAREHOLDERS' EQUITY, DIVIDEND
                RESTRICTIONS and ACCOUNTING PRACTICES

                A  reconciliation   of  net  income  as  filed  with  regulatory
                authorities to net income reported in the accompanying financial
                statements for the years ended December 31, 1997, 1996 and 1995,
                follows:
<TABLE>
<CAPTION>

                                                                     1997                   1996                  1995
                                                                 -----------            -----------           ------------
                  <S>                                           <C>                    <C>                    <C>

                  Statutory net income                           $12,923,916            $12,636,652            $ 9,373,483

                  Reconciling items:
                   Policy liabilities
                    and accruals                                   1,023,822              1,326,891                287,030
                   Deferred policy
                    acquisition costs,
                    net of amortization                            6,540,657              7,264,136              5,810,497
                   Investment valuation
                    differences                                    1,014,686                836,719              3,436,669
                   Deferred taxes                               (  1,637,944)          (  3,597,781)          (    914,707)
                   Other, net                                   (    304,769)          (    800,367)          (    111,380)
                                                                 -----------            -----------            -----------

                  GAAP net income                                $19,560,368            $17,666,250            $17,881,592
                                                                 ===========            ===========            ===========
</TABLE>

                                       145

<PAGE>
INCORPORATED BY REFERENCE, PAGE 32 OF THE COMPANY'S 1997 ANNUAL
                       REPORT TO SHAREHOLDERS                                 


                          NOTES TO FINANCIAL STATEMENTS


  NOTE 9.         STATUTORY  NET  INCOME  and  SHAREHOLDERS'  EQUITY, DIVIDEND
                  RESTRICTIONS  and  ACCOUNTING  PRACTICES (CONTINUED)

                A  reconciliation   of   shareholders'   equity  as  filed  with
                regulatory  authorities to shareholders'  equity reported in the
                accompanying  financial  statements  as of December 31, 1997 and
                1996, follows:
<TABLE>
<CAPTION>

                                                                                         1997                    1996
                                                                                     ------------             ------------
                  <S>                                                               <C>                      <C>

                  Statutory shareholders' equity                                     $ 79,651,074             $ 73,410,532

                  Reconciling items:
                   Asset valuation and interest
                  maintenance reserves                                                 25,578,142               23,909,912
                   Investment valuation differences                                    30,209,060                9,236,050
                   Deferred policy acquisition costs                                   64,567,085               58,026,428
                   Surplus note                                                     (  15,000,000)           (  15,000,000)
                   Policy liabilities and accruals                                      3,444,355                2,073,738
                   Deferred taxes                                                   (  24,409,317)           (  15,614,492)
                   Deferred and uncollected
                   premiums                                                         (   4,235,579)           (   3,952,730)
                   Other, net                                                             574,381                  541,051
                                                                                     ------------             ------------

                  GAAP shareholders' equity                                          $160,379,201             $132,630,489
                                                                                     ============             ============
</TABLE>


                  The   amount   of    dividends    Erie    Family    Life,    a
                  Pennsylvania-domiciled   life   insurer,   can   pay   to  its
                  shareholders  without the prior  approval of the  Pennsylvania
                  Insurance  Commissioner  is limited by statute to the  greater
                  of:  (a)  10  percent  of its  statutory  surplus  as  regards
                  policyholders  as shown on its last annual  statement  on file
                  with the  commissioner,  or (b) the net income as reported for
                  the period  covered by such  annual  statement,  but shall not
                  include pro rata  distribution  of any class of the  insurer's
                  own securities. Accordingly, the maximum dividend payout which
                  may be made in 1998 without  prior  Pennsylvania  commissioner
                  approval is  $12,924,000.  Dividends to  shareholders  totaled
                  $5,103,008 in 1997.

                  The Company  prepares its  statutory  financial  statements in
                  accordance  with  accounting   practices   prescribed  by  the
                  Pennsylvania   Insurance   Department.   Prescribed  statutory
                  accounting  practices include a variety of publications of the
                  National  Association of Insurance  Commissioners  (NAIC),  as
                  well as state laws,  regulations  and  general  administrative
                  rules.


NOTE 10.          STOCK SPLIT

                  In May 1996, a  three-for-one  common stock split was approved
                  by the Company's  shareholders  effective for  shareholders of
                  record May 2, 1996.  The par value of each share of the common
                  stock was changed to $.40 per share.  The number of authorized
                  shares was  increased to  15,000,000  shares and the number of
                  shares issued and outstanding was increased to 9,450,000.  All
                  per share data in the  accompanying  financial  statements has
                  been restated to reflect this change.

                                       146

<PAGE>
INCORPORATED BY REFERENCE, PAGE 32 OF THE COMPANY'S 1997 ANNUAL
                       REPORT TO SHAREHOLDERS                                


                          NOTES TO FINANCIAL STATEMENTS


NOTE 11.          UNAUDITED QUARTERLY SUMMARY OF OPERATIONS

                  The following summaries of operations for the four quarters of
                  1997 and 1996 are  unaudited.  In the opinion of the Company's
                  management,  all  adjustments  -  consisting  only  of  normal
                  recurring  accruals  necessary for a fair  presentation of the
                  interim periods presented have been included.
<TABLE>
<CAPTION>

                             First                Second               Third                Fourth
                            Quarter               Quarter              Quarter              Quarter
<S>                        <C>                 <C>                   <C>                  <C>
1997

Policy revenue             $ 8,468,025         $ 8,814,338           $ 8,661,427          $ 9,249,682
Investment income           12,401,283          12,211,491            12,418,846           12,882,672
Realized gain
 on investments                621,782             746,305             2,507,707            1,325,571
Other income                   140,299             185,125               189,902              212,943
                           -----------         -----------           -----------           ----------

  Total revenues           $21,631,389         $21,957,259           $23,777,882          $23,670,868
                           ===========         ===========           ===========          ===========

Income from
 operations                $ 6,586,018         $ 6,997,337           $ 9,057,854          $ 7,562,046

Federal income taxes         2,184,954           2,384,074             3,531,183            2,542,676
                           -----------         -----------           -----------          -----------

  Net income               $ 4,401,064         $ 4,613,263           $ 5,526,671          $ 5,019,370
                           ===========         ===========           ===========          ===========

  Net income
   per share               $      0.47          $      0.49          $      0.58          $      0.53
                           ===========          ===========          ===========          ===========


1996

Policy revenue             $ 7,167,502         $ 7,985,385           $ 7,680,471          $ 8,282,804
Investment income           11,273,287          11,401,321            11,622,874           11,651,487
Realized gain
 on investments                 10,322             762,305               898,400            3,315,870
Other income                   136,492             214,533               126,258              190,927
                           -----------         -----------           -----------          -----------

  Total revenues           $18,587,603         $20,363,544           $20,328,003          $23,441,088
                           ===========         ===========           ===========          ===========

Income from
 operations                $ 4,224,697         $ 6,991,906           $ 6,220,400          $ 9,205,684

Federal income taxes         1,545,891           2,580,512             1,678,397            3,171,637
                           -----------         -----------           -----------          -----------

  Net income               $ 2,678,806         $ 4,411,394           $ 4,542,003          $ 6,034,047
                           ===========         ===========           ===========          ===========

  Net income
   per share               $      0.28         $      0.47           $      0.48          $      0.64
                           ===========         ===========           ===========          ===========

</TABLE>

                                       147
<PAGE>